Natus Medical (NASDAQ:BABY) continued the trend from the first quarter of the year: Revenue came in substantially higher in the second quarter, due to the addition of revenue from the company's newest acquisition, Otometrics, but earnings were lower, even when measured on a non-GAAP basis.

Natus Medical results: The raw numbers

Metric

Q2 2017

Q2 2016

Year-Over-Year Change

Revenue

$122.2 million

$96 million

27.3%

Income from operations

($6.3 million)

$13.9 million

N/A

Earnings per share (EPS)

($0.15)

$0.32

N/A

Adjusted EPS

$0.34

$0.39

(12.8%)

Data source: Natus Medical.

What happened with Natus Medical this quarter

  • The jump in revenue was due to the addition of Otometrics, which was acquired in the last year. Revenue from Natus' neurology business decreased 3.2%, and revenue from newborn-care products decreased 1.7%.
  • The GAAP loss came from one-time events, including costs for acquisitions; fixing the ongoing issues with the manufacturing facility that had been the subject a warning letter from the Food and Drug Administration; and establishing a reserve for collections for unpaid invoices for Peloton, the company's hearing screening service. The latter isn't technically a one-time event, because Natus will always have some collection issues, but the reserve is an accounting change to account for thousands of small bills it's accumulated over the last few years; going forward, the amount going into the reserve will be a just quarter's worth at a time.
  • Nevertheless, earnings still fell on a non-GAAP basis as profitability for newborn-care products cut into margins and Natus is still working to increase profitability of Otometrics.
  • In June, the company unveiled Otoscan, Otometrics' new hearing-aid fitting product that uses a camera to make a digital image of the customer's ear. Natus thinks the digital image will be faster and more accurate than the traditional molds used to fit hearing aids, producing a potential annual market opportunity of about $200 million.

What management had to say

CEO James Hawkins is really excited about the potential for Otoscan:

We're convinced we have a huge jump over anyone. We don't even really know of anyone that's anywhere near where we're with this product. And it is something that the hearing aid manufacturers are -- I don't want to say dying for -- but they really are excited about.

To get the Peloton business profitable again, Natus has changed its business model to make hospitals more responsible for the payments as outlined by Hawkins:

As these contracts come up for renewal, we're able to renegotiate them in a positive way. So we see Peloton going forward being profitable again and growing profitability as these contracts get renegotiated over the next year.

Mom holding newborn as she is seated in hospital bed

Image source: Getty Images.

Looking forward

While the first half of the year has been a challenge for Natus, the company foresees brighter days ahead. Revenue and earnings are expected to ramp up in the second half of the year as Natus completes the integration of Otometrics and turns around Peloton. Management guided for revenue of $121 million to $123 million in the third quarter, with adjusted earnings per share falling in the range of $0.37 to $0.38. Compared to the recently completed quarter, that's flat revenue with an increase in profitability.

For the full year, management thinks revenue will fall in the range of $505 million to $510 million; this number, minus the first-half results and third-quarter guidance, puts fourth-quarter revenue above $135 million, a substantial bump from the first three quarters. Adjusted earnings are expected to be in the range of $1.70 to $1.75 for the year, again a huge acceleration from the first three quarters of the year.

Longer term, Natus thinks it can grow revenue organically by 5% to 7% annually. Add in increased profitability and smart acquisitions, and the company should be able to grow earnings by double digits.

Unfortunately, investors are going to have to wait another six months to see if the company is on its way toward reaching that goal.

Brian Orelli has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Natus Medical. The Motley Fool has a disclosure policy.